Partnering In Construction: Improvementthrough Downloaded from ascelibraryorg by 3744193189 on 01/24/18 Copyright ASCE For personal use only; all rights reserved Integration And Collaboration SEVDA BAYRAMOGLU ABSTRACT: The fragmentation of the traditional construction process is described, with attention given to the problems that can arise in the areas of time, cost, and quality Because of the different phases and the different parties for those phases, coordination can prove elusive The author explains how partnering can ameliorate many of these problems In particular, the benefits of strategic partnering in fostering and maintaining expertise from one project to the next and in quickly resolving disputes are discussed C onstruction industries and, consequently, construction firms, face a set of unique problems These problems derive from the general characteristics of the construction industry which distinguish it from the manufacturing sector as well as from the business environment and the nature of construction projects After these problems and their causes have been defined, this article discusses how partnering can eliminate or reduce the implications of such problems PROBLEMS:CAUSES AND EFFECTS In The Management of Construction Firms: Aspects of Theory (London: Macmillan, 1989), editors M Hillebrandt and J Cannon explain the well-known characteristics of products of the construction industry that differentiate them strongly from most other industries: Their location is fixed, their geographical distribution widespread, they are large, heavy, one-off and custom built, generally long-lived and expensive Those characteristics go a long way to explain methods of production, and organization, price determination, payment methods, financial decisions and controls, and an industrial structure unlike those met in other sectors Hence the construction process generates management problems and opportunities at the level of the firm which may differ in scope, in scale, in time, and in the type of appropriate solutions from those met in firms of other industries When the phases involved in the realization of a construction project are considered, along with the clear differentiation between these phases and the fact that different organizations are involved at different stages, it can be seen how coordination problems arise between the different parties involved in the project Since the contractor firm, which is involved with the actual production of the project, enters the project team after the bid, it has no control over the design decisions This can lead to redundant, costly design solutions, as well as to a failure to consider technological problems that can arise in the construction phase The 39 Leadership Manage Eng, 2001, 1(3): 39-43
Downloaded from ascelibraryorg by 3744193189 on 01/24/18 Copyright ASCE For personal use only; all rights reserved fragmented nature of the traditional construction process is known to create problems with regard to schedule, cost, and quality An exclusive characteristic of construction is that each project undertaken is unique and cannot be repeated The construction site, the local conditions for example, soil, climate, and manpower the technology, the topography, the site plan, the materials and equipment used, and many other factors vary from one project to another These variables differentiate construction firms from other production firms, which have stable and repetitive production methods In construction, the site of production varies from one project to the next, while the product components are at a fixed location Among the problems arising from everchanging construction sites are obtaining, transporting, and storing equipment and materials; forming work crews and meeting manpower needs; and handling the attendant costs In production industries, the work site is usually within or close to the production site This proximity makes it possible to find immediate solutions to problems, to make new decisions, and to put new procedures in place Because of changing site locations, the production site is usually not close to the work site in the construction industry As pointed out by E Tas in an unpublished doctoral thesis (in Turkish) completed at Istanbul Technical University in 1994, this requires a management team for each site, leading to high managerial costs Construction contractors usually set up the site using an advance payment from the client They then receive payment during the project based on the percentage of work completed They have to document the amount of work completed at the end of each month to receive payment These funds are usually used to carry out the work during the following month Delays in payment may lead to delays in project completion and put the contractor at greater financial risk The existence of construction firms is dependent upon the projects they undertake In this industry, where there are many ever-changing variables, the ability to accurately estimate the cost of a project, and thereby determine profitability, is critical to construction firms because, as Tas points out, they are dependent solely on client financing Because construction firms have to work with limited funds, it is crucial that they determine their financial needs and profitability for the duration of the project beforehand Even small mistakes in these estimates can lead not only to a reduction in their target profit but also to outright bankruptcy Fair competition is a difficult concept to implement in the construction industry Competition in the construction industry is more limiting than in other industries This is caused by unfair competition from firms that, with regard to technical capabilities and organizational strength, are not sufficiently qualified It is very easy to enter the construction industry because no large initial investment is required Nor does it require a great deal of education and experience It is very common to enter into joint ventures for a particular project and then to liquidate immediately after the project is completed Thus there are a large number of companies of all different sizes active in this industry O Akguc, in an article published in the Turkish journal Turkiye Bankalar Birligi Yayinlari in 1987 (number 139), points out that the large number of firms active in the construction industry creates a very competitive climate, one where some construction firms, in order to maintain their existence in the market, are forced to accept projects at a lower profit margin A slight miscalculation in such instances can easily lead to great financial risk According to Tas, a contractor can lower its bid only by sacrificing profit or by putting itself further at risk A poor selection process becomes obvious in the construction industry when large construction firms go out of business because they are forced to submit lower bids than their competitors in order to win a contract The fact that these competitors may include construction firms that would perform the work at a much lower quality standard points to a weakness in the bidding system Clients who are not aware of this weakness in the construction industry may accept the lowest bid, just as they would in the production industry There are other serious implications when the lowest bid is the only factor that counts in selecting a construction firm For example, to avoid sustaining a loss, the firms may have to use construction materials of lesser quality in the project This method threatens the existence of large construction firms, reduces the quality of the work, or leaves the contractor in a position where it is forced to request additional payment from the client Given the adversarial nature of the construction industry, any of these instances (changes in schedule, cost, or quality requirements) may lead to disputes that could rapidly escalate to the point where they would have to be resolved through legal channels When such disputes are resolved in court, all parties lose time and incur costs The proceedings serve to undermine the relationship between the parties and to eliminate any chances of them working together again The traditional procurement process (competitive tendering) has further adverse implications for contractors Candidates must provide performance and surety bonds as required by bidding regulations They must also prepare an offer in accordance with contractual conditions Because conditions vary from one project to another, each bid involves an evaluation of the productivity of the machinery, the qualifications of the workforce, the nature of the work site, and the climatic conditions that will be encountered Even if there is only a small possibility of receiving the contract, the firm must take these factors into serious consideration in preparing its bid If the firm is not selected for the project, the costs 40 Leadership Manage Eng, 2001, 1(3): 39-43
Downloaded from ascelibraryorg by 3744193189 on 01/24/18 Copyright ASCE For personal use only; all rights reserved incurred in preparing the bid must be absorbed Nevertheless, construction firms must be prepared to accept such financial losses Additionally Hillebrandt and Cannon note that any contracting firm has to respond to the changing environment of the marketplace for projects and of the market for resources every time it tenders for a job The firm s success or failure is determined by the nature of its response The long duration of projects undertaken by construction firms can lead to miscalculations in the initial estimates of time and cost Tas notes that, in contrast to other organizations, construction firms often have very little capital of their own As a result, they are easily affected by the uncertainties and risks common in the construction industry They are continually affected not only by political decisions but also by climatic conditions, the timely or untimely payment of fees, changes in material prices, and other factors Consequently, the project may not be executed and completed as planned These factors will be reflected in the cost, schedule, and quality of the project As an end result, these factors may lead to changes in the agreed duration and the costs stipulated in the contract, reduce the profit margin, and impose great financial risk It is also very difficult, if not impossible, for a construction firm to determine manpower, material, and equipment needs in advance Each project has specific requirements in these Figure 1 Traditional Construction Process areas Marketing research and bidding procedures will require reorganization for each project, a process that is both time consuming and costly There are many more risk factors involved in the construction industry, and these come into sharper focus with fixed-cost contracts Such factors may be external, for example, climatic conditions, problems in obtaining materials, or delays in subcontracted works Internal factors include technological inefficiencies, inexperience, and overloading of the construction firm Owing to the unique nature of each construction project, the lack of routine procedures, and the fact that various external factors cannot be predetermined, site managers must function as both specialists and managers As Hillebrandt and Cannon put it, Adequate numbers of high-quality managers are thus the most important assets of a contracting firm What the contracting firm is really selling is its management skills HOW PARTNERING CAN REDUCE THESE PROBLEMS Introducing a process where all parties are involved in the project before design begins can reduce the problems caused by the fragmented nature of the traditional construction process Figure 1 shows the traditional construction process 41 Leadership Manage Eng, 2001, 1(3): 39-43
Downloaded from ascelibraryorg by 3744193189 on 01/24/18 Copyright ASCE For personal use only; all rights reserved and clearly delineates each of the parties involved in the project The preferred method for procurement in partnering is one based on quality and compatibility, rather than solely on cost Partnering encourages the establishment and development of high-quality project teams Repeat business is very common, and many firms that start off as project partners eventually move toward strategic partnering The long-term benefits of partnering are realized when the same project team is brought together on multiple projects The partnering process differs from the traditional construction process in terms of project integration The processes relating to tendering have been replaced with an alternative procurement process including interviews thattakesplaceimmediatelyinresponsetoaclientinitiative By bringing the core teamy client, architects, engineers, and contractors and in some instances the extended team specialty contractors and suppliers together from the outset of the project, partnering provides a more integrative approach to the design process All team members are encouraged to express their views up front In this way, through brainstorming sessions and open discussions, creative solutions can come to light early in the design stage Since both the client and the contractor are involved, the architect is not the sole decision maker in the design process Partnering encourages value-engineering solutions; hence the architect is more likely to refrain from incorporating design items that do not add value to the project The most economical and viable design solution that conforms to the client s requirements and expectations is developed In this sense, partnering offers a solution to problems in coordinating the efforts of the various parties, reduces redundant and costly designs, and offers technologically feasible and innovative solutions during the design stage, reducing unforeseen risks during implementation Partnering also eliminates some of the problems associated with the competitive tendering process Partnering encourages contractor selection based largely on qualitative criteria and partnering experience, rather than on lowest bid Although cost remains an inevitable factor, it is assessed in terms of long-term economic implications (life-cycle costing) rather than initial cost Therefore the partnering approach recognizes that the lowest bid is not necessarily the most economical solution Whereas the traditional procurement process often involves long lists of candidates and selection criteria based on the lowest bid, clients using the partnering approach often select their contractor partner through interviews Contractors may still be required to submit a quote, but the final decision in contractor selection is based on such factors as compatibility, competence, views on partnering, partnering experience, and quality, rather than on the lowest quote It should be acknowledged, however, that a selection process based on interviews might not always be possible, particularly in public construction projects where it is mandated by law that the project be awarded through competitive tendering The model depicted in figure 2 represents the ideal partnering arrangement, which is perfectly applicable in the private construction context This model works particularly well in strategic partnering arrangements However, this is not to say that partnering cannot be implemented on public projects As discussed by the present author in his unpublished doctoral thesis ( Partnering: Applicability to the Turkish Construction Sector ), completed at Istanbul Technical University in 2000, and described in Partnering in the Public Construction Sector (Loughborough, United Kingdom: European Construction Institute, 1997), postaward project-specific partnering is a method applicable to situations requiring competitive tendering procurement methods By eliminating the competitive tendering process (where permitted by procurement law) a selection process aimed at selecting the most appropriate contractor can do the following: Eliminate unqualified contractors; Reduce the pressure on the contractor to submit the lowest bid; Enable the contractor to retain a fair profit margin; Lower the financial risk that contractors must face; Potentially improve quality and client satisfaction; Reduce requests for additional payments As a result, the procurement process used in the partnering approach reduces potential disputes in the construction industry Additionally, the partnering approach offers unique solutions for dispute resolution Although each partnering arrangement may have its own process for resolving disputes (usually agreed upon at the initial workshop), the basis of the dispute resolution process is quite standard that is, disputes are to be resolved at the lowest level possible If the escalation of disputes can be seen as a ladder, partnering encourages disputes to be resolved at the lowest step possible Only when it has become impossible to resolve the problem at the level where it started for example, a dispute between a construction worker for the subcontractor and a worker for the main contractor is the issue raised to the next level Although partnering arrangements are set up with such hierarchical ladders for dispute resolution, case studies show that most problems are resolved at the level at which they were initiated The trust, better communication, and informal working relationships encouraged by the partnering approach have shown themselves to be instrumental in achieving rapid and fair dispute resolution Even if the organizations involved cannot resolve the disputes, partnering discourages lawsuits In such instances, the 42 Leadership Manage Eng, 2001, 1(3): 39-43
Downloaded from ascelibraryorg by 3744193189 on 01/24/18 Copyright ASCE For personal use only; all rights reserved matter is usually adjudicated in an out-of-court format In this arrangement, a decision made by a neutral party is accepted as a fair resolution, and construction continues in accordance with this decision Once the project is completed, further legal measures can be taken if still necessary However, since all parties agree to appoint an adjudicator at the signing of the contract, issues are usually resolved out of court This naturally eliminates the losses and delays that court cases would have entailed Partnering also encourages the sharing of risks and rewards Since all parties are included in project decisions from the outset, each party assumes responsibility when unforeseen risks emerge Conversely, if the project is completed under budget, the additional profit is shared Partnering offers a working arrangement based on equity The contractor is relieved from shouldering the majority of risk, and with the additional financial incentives offered to the contractor, the client is more likely to receive its project with time and cost savings, as well as with higher quality Thus, for all parties concerned, partnering reduces many of the risks involved in construction Although project partnering alone may provide the benefits explained above, research findings demonstrate that additional benefits can be obtained through strategic partnering These include further reductions in schedules and cost and indirect benefits from establishing long-term relationships with the same partners When organizations become strategic partners, the procurement process is eliminated as well This factor alone leads to reductions in time and cost Clients are more comfortable working with partners they have worked with before, and contractors have a certain feeling of security arising from potential future projects Since the very survival of contractors depends upon obtaining contracts for projects, the unstable nature of the construction market always poses a threat to their existence Through strategic alliance agreements, contractor organizations are to some extent protected from harsh market conditions, even in times of recession It also becomes somewhat easier for them to make strategic plans Although partnering offers promising solutions for improving the construction industry, there is a limit to the changes that the partnering approach can bring Some facts about the construction project remain unalterable Regardless of the approach used, each project will be unique; the project characteristics, construction site, local conditions, technology, topography, materials, and equipment will vary from one project to the next These variations make it difficult to anticipate problems, and many of the lessons learned from one project may not be applicable to another One measure against unforeseen risk was mentioned earlier as risk equity A more important factor in dealing with the unique characteristics of the construction project is the rapid decision-making mechanism that the partnering approach uses The partnering approach encourages empowerment As with dispute resolution, decisions are taken at the lowest level possible This makes it possible for decisions to be made quickly and to be made by the person directly involved with the problem Not only are unforeseen problems resolved more efficiently; the decisions made by people actually involved with the problem are usually more reliable and effective Consequently, through partnering many problems can be eliminated, and the adverse effects of others can be reduced Strategic partnering arrangements can offer an additional benefit by eliminating at least two of the variables involved in the construction process: the client and the process Working with the same client helps contractors further develop relationships, become more comfortable with each of the partners, and produce better overall results If the partners stay together on other projects, the process becomes more familiar, all parties know what to expect, and both the process and the end results can be continuously improved Sevda Bayramoglu, PhD, is the deputy director of the Project Management Center at Istanbul Technical University, Istanbul, Turkey LME 43 Leadership Manage Eng, 2001, 1(3): 39-43